Symposium: “Schrödinger’s tax” is dead – and the command to buy health insurance is unconstitutional

This article is part of a symposium previewing California v. Texas.

Matthew Forys is the associate general counsel and chief of staff at the Landmark Legal Foundation. He filed an amicus brief on Landmark’s behalf in support of Texas.

Congress amended the Affordable Care Act’s shared responsibility payment to $0 in 2017, calling into question whether Section 5000A can still be interpreted as a proper exercise of Congress’ taxing power, as held by the Supreme Court in National Federation of Independent Business v. Sebelius. If the initial hurdle of standing is cleared in California v. Texas, the court will focus on what remains of the ACA’s individual mandate: mere suggestive language or an improper command that violates the commerce clause.

Section 5000A mandates that Americans not otherwise exempt “shall” have “minimum essential coverage” of health insurance. This command is followed by a “shared responsibility payment” or “penalty” imposed on those who fail to comply. In NFIB, the court ultimately interpreted Section 5000A as creating a tax and not a regulatory command and penalty. In the ACA litigation leading up to NFIB, the question of whether to analyze the section’s key elements — the command and the payment — as separate, stand-alone provisions or to take them as a whole was a recurring preliminary issue. With the revision of the payment to zero, this issue has resurfaced in California v. Texas.

In Seven-Sky v. Holder, an ACA challenge decided by the U.S. Court of Appeals for the District of Columbia Circuit seven months before the Supreme Court’s ruling in NFIB, Judge Laurence Silberman observed that the mandate “imposes obligations independent” of the penalty and that the two elements were “analytically and legally separate.” Then-Judge Brett Kavanaugh wrote in his dissent that the suit was barred by the Anti-Injunction Act, a statute prohibiting lawsuits over tax assessment and collection until after taxes are paid. Kavanaugh suggested that the court should avoid the constitutional questions raised by Section 5000A because Congress could easily fix them in the near future. A “minor tweak” by Congress to the statutory language would “establish the law’s constitutionality under the Taxing Clause.” But, he noted, “The Taxing Clause has not traditionally authorized a legal prohibition or mandate, as opposed to just a financial disincentive or incentive.” As it stood, someone failing to purchase health insurance might be acting illegally. (This is a key difference between a regulatory penalty and a tax. Penalties are triggered by the failure to meet legal obligations while taxes are collected on otherwise law-abiding citizens.) Kavanaugh proposed several ways Congress could correct the constitutional problems, such as removing and replacing the command language in subsection (a) or adding language that reframed the mandate and penalty as an integrated whole: “The taxpayer has a lawful choice either to maintain health insurance or make the payment to the IRS required by Section 5000A(a)-(c).”

The Obama administration drew upon Kavanaugh’s taxing power analysis in its brief arising from another ACA challenge and argued that a tweak was not necessary. The language of subsection (a) could be “read in the context of Section 5000A as a whole” as merely a predicate for tax consequences. “To the extent the constitutionality of Section 5000A under Congress’s taxing power turns on whether subsection (a) creates an independent legal obligation, the statute must be read not to do so,” the Obama Justice Department wrote. It urged the Supreme Court to interpret Section 5000A as “an integrated set of incentives.” Chief Justice John Roberts apparently took note.

In NFIB, a divided court issued a fractured decision with Roberts at the center. Some portions of Roberts’ opinion stood as the opinion for the court, while in other portions Roberts wrote only for himself. Five justices agreed that the individual mandate could not be upheld under the commerce clause or the necessary and proper clause, as can be seen by combining Part III-A of Roberts’ opinion with the four conservatives’ dissent. In their view, compelling citizens to engage in commerce went beyond the broadest reading of the commerce clause.

In Parts II and III-C, Roberts wrote the opinion of the court with the support of the four liberals, including the late Justice Ruth Bader Ginsburg, to address the nature of the shared responsibility payment: either regulatory penalty or tax. For purposes of the Anti-Injunction Act, it was a penalty and not a tax because Congress described it as a penalty. For constitutional purposes, however, it was a tax and not a penalty when analyzed under a functional test. (Some have remarked that Roberts created Schrödinger’s tax.)

Writing only for himself in Part III-B, Roberts admitted, “The most straightforward reading of the mandate is that it commands individuals to purchase insurance.” Using the canon of constitutional avoidance, he adopted a saving construction. Rather than reading the mandate as a command to buy insurance or pay a penalty, which was impermissible under the commerce clause, it could reasonably be seen as imposing a tax on not having health insurance, just as the government taxes gasoline or income. The four conservatives did not join Roberts on this point, finding instead that this reading did “violence” to the plain meaning of the words. (As was raised frequently during her confirmation hearings, then-Professor Amy Coney Barrett agreed with the conservatives in a journal article that the chief pushed the ACA “beyond its plausible meaning to save the statute.”)

Roberts continued in Part III-C to describe how the payment “looks like a tax.” It is paid by taxpayers; calculated by factors like taxable income, number of dependents and filing status; located in the Internal Revenue Code; and enforced by the IRS. It is further assessed and collected in the same manner as a tax, yielding “the essential feature of any tax: it produces at least some revenue for the Government.” He then used a “functional approach,” relying on an extremely restrictive regulatory scheme in Child Labor Tax Case, to establish that the payment was a tax and not a regulatory penalty. Perhaps anticipating that he was expanding congressional authority through the taxing power, he wrote that although broader than the commerce clause, the taxing power does not have the same ability to control individual behavior. Using similar language to Kavanaugh’s in Seven-Sky, he wrote that a tax, as opposed to a penalty, “leaves an individual with a lawful choice to do or not do a certain act, so long as he is willing to pay a tax levied on that choice.”

In her partial dissent, Ginsburg chided Roberts for unnecessarily rejecting the government’s commerce clause argument if the mandate could be upheld under the taxing power. He responded in Part III-D that he had to address the commerce clause first because the mandate reads more naturally as a command to buy insurance than a tax. It was only because the mandate failed under the commerce clause that the saving construction was necessary. He concluded, “The Federal Government does not have the power to order people to buy health insurance. Section 5000A would therefore be unconstitutional if read as a command.” Thus, a majority found the individual mandate violated the commerce clause when subsection (a), the command, was viewed in isolation. Only when the saving construction was applied could the command be seen as “integrated” within a tax on those without health insurance and upheld under the taxing power.

In 2017, Congress amended the ACA through the Tax Cuts and Jobs Act. It left the framework in Section 5000A(a)-(c) intact, but set the payment amount to the lesser of “zero percent” of an individual’s household income or “$0” in subsection (c). We are left to ponder what almost seems to be a philosophical thought experiment: Is a tax set at zero dollars still a tax? Under NFIB, the answer is likely no. Subsection (c) no longer has some of the attributes that made it “look like a tax” to Roberts and, most importantly, it no longer has “the essential feature” of any tax — raising revenue for the government.

Following this logic, in the opinion for the U.S. Court of Appeals for the 5th Circuit that is now on review at the Supreme Court, Judge Jennifer Elrod found NFIB’s saving construction is no longer available. What remains is a command to buy insurance that was already found unconstitutional in NFIB. Judge Carolyn King, in dissent, countered that the amendment “does nothing more than require individuals to pay zero dollars to the IRS if they do not purchase health insurance, which is to say it does nothing at all.” She also argued that the “lawful choice” framework still remains in place. “Under the new scheme, applicable individuals can lawfully choose between maintaining health insurance and doing nothing. In other words, the coverage requirement is a dead letter — it functions as an expression of national policy or words of encouragement, at most.” The states defending the ACA similarly argued that what remains of the mandate is merely a suggestion, like the flag code. (The flag code, however, uses the more permissive term “should” rather than the ACA’s “shall.”) But this goes against the chief’s clear language in Part III-D that the command standing alone is unconstitutional.

In NFIB, Roberts appeared reluctant to risk the court’s institutional reputation in a politically charged case. His saving construction showed deference to the executive and legislative branches. Since then, three new justices have joined the court and two of them, Kavanaugh and Barrett, have already expressed doubt about the chief’s initial interpretation. The independent obligation created by the command is now harder to ignore. Assuming the challengers have standing, it appears unlikely the individual mandate survives this time. On to severability.